This article will describe some of the basics when it comes to the taxes you may pay in South Korea or Japan as an expat.
It will focus on different forms of tax and not just taxes for individuals.
The article will end with a simple tip to reduce your taxes to potentially 0% if you want to live in either country for less than 5 years.
Whilst it shouldn’t be considered official tax advice, we have done our best to ensure that the information is correct at the time of publishing.
If you have any questions, or are looking for expat specialised and tax efficient investments, you can email me (advice@adamfayed) or use this form.
Export and import tax is a mandatory payment provided for by the tax legislation of the state, which is levied by the fiscal authorities of entities carrying out export-import operations.
This type of tax is usually used by the state as a tool for regulating foreign trade operations. By increasing or decreasing rates for the import of goods or their export abroad, it is possible to regulate the amount of profit received by business entities. For example, with a high export tax, it will be profitable for companies to produce and sell domestic products.
The object of taxation can be:
- The volume of export-import transactions in monetary terms, which is calculated in the national currency of the state;
- The quantity of goods imported or exported in weight or quantity.
In this article we will have an in-depth talk about taxes in two most powerful countries such as Japan and South Korea. Mainly, this article is about the local and overseas taxes, capital gains and local property of both countries.
Over the past half century, the Republic of South Korea has achieved economic transformation that many would consider impossible.
In just 50 years, it has gone from a poverty-stricken, war-torn country to a world-class high-tech economy, a full member of the OECD (Organization for Economic Cooperation and Development, OECD), known for its consumer electronics such as smartphones or flat-screen TVs, and the production of such goods, such as cars, ships, oil and gas platforms (Korea is currently building the world’s largest semi-submersible drilling platform).
In 2018, South Korea – for the fifth time in a row – took 1st place in the Bloomberg Innovation Index.
This index ranks countries according to seven criteria, including research and development spending and the concentration of high-tech state-owned companies in the country.
Samsung Electronics Co., the most expensive company in the country and the second largest company in the world after Apple by market capitalization, received in the 2000s, more US patents than any other, second only to IBM.
And its products – semiconductors, smartphones and digital multimedia equipment – have made possible the government-backed ecosystem of Korean suppliers and partners.
The Republic of Korea, according to UNESCO, is today the leader in spending on R&D: 4.2% of GDP is more than the United States (2.7%) and Japan (3.2%), two world innovation leaders.
Korean Samsung, according to IDC, is the largest smartphone retailer in the world: every fifth device sold in the world is manufactured at the factories of this Korean company.
In the third quarter of 2018 alone (more recent data is not yet available), the company sold 72.2 million smartphones – the number of phones that could be provided to the population of Thailand.
The actively developing beauty industry and cosmetics as a national brand have spawned a large number of beauty bloggers who, in terms of audience size, can rival those of America.
Thus, Korean and world media rank the Pony video blogger with an audience of more than 4.8 million subscribers on YouTube in 1st place, calling her “perhaps the most famous on Korean YouTube.”
Due to the growing popularity of K-beauty around the world, Western brands are constantly seeking inspiration from their South Korean counterparts as they try to adapt popular South Korean beauty formats for Western consumers, says Jen Jang, Senior Beauty Analyst at Mintel, in her report “Bright Future: South Korea entered the top 10 global beauty markets. “
Tourism has also increased in South Korea, now Korea is booming in foreign tourists, primarily due to the international expansion of Korean culture and major sporting events.
But, what kind of is the tax system of South Korea? The tax system in Korea is based on the division of all types of taxes collected on its territory into two main groups: national and local taxes.
National taxes are divided into:
- direct taxes, which include income tax, corporate tax, inheritance and gift taxes
- indirect taxes, which include value added tax, excise tax on alcoholic beverages, transport tax, tax on telephone users.
Local taxes, in turn, are subdivided into:
- regional (provincial) taxes: license fee, road maintenance tax, regional development tax
- city taxes: tobacco excise, road user tax, registration fee.
The share of national taxes in total tax revenues is 80.2%, while the share of local taxes is 19.8%.
The largest share in the structure of national taxes is occupied by: value added tax – 23.6%, income tax (profit tax) – 18.6%, corporate tax – 11.8%.
National Tax Policy is under the jurisdiction of the Ministry of Finance and Economy, which also includes the National Internal Revenue Service and the National Tax College.
The Taxation Department of the Ministry of Finance and Economy is responsible for planning tax policy and drafting tax laws. The National Tax College is responsible for educating students who will later work as tax inspectors.
The country’s tax system is based on a purposeful policy to stimulate the export of products abroad:
- exemption from taxes and duties on imports of intermediate goods and equipment
- discounts for indirect taxation (for example, commodity and corporate taxes) in the manufacture of products intended for export
- 50% discount on income tax from export operations
Foreign companies operating in the non-manufacturing sector are provided with loans to pay value added tax and expenses related to the establishment of their business.
Thus, foreign corporations are able to cover the value added expense paid for the purchase of goods and the use of services in Korea.
These services include expenses for the accommodation of company employees, payments for advertising and office rent, utilities.
Officials from the Ministry of Finance and Economy have officially stated that the introduction of a value-added tax credit system is designed to bring Korea’s tax policy closer to progressive countries that use a value-added tax system.
The introduction of a value added tax credit scheme will allow Korean corporations operating in Germany to also receive value added tax credits, since Germany applies the principle of reciprocity in taxing foreign firms operating in its territory.
In order to obtain credits for the payment of value added tax, foreign corporations only need to submit the relevant documents to the tax office.
On Thursday, June 25, South Korea proposed to raise its capital gains taxes to increase the number of wealthy equity investor taxpayers in an effort to reduce inequality by charging more from the wealthy and less from general stock transactions.
Finance Minister Hong Nam-ki has announced that starting in 2023, retail investors will be taxed up to 25% on annual capital gains exceeding 20 million won ($ 16,627). This tax increase will affect about 300,000 people, or 5% of the top stock investors in Asia’s fourth largest economy.
In addition, the tax changes will herald a significant expansion of the existing rules, as capital gains taxes apply only to large shareholders with shares in excess of 1% or 1 billion (S831,373) of listed shares.
Currently, retail investors in listed shares are not subject to capital gains tax unless they are classified as “major shareholders”.
About 95% of equity investors receive less than 20 million won in annual return on investment.
For most of these investors, taxes will be reduced, and by 2023, for KOSPI-listed stocks, transaction taxes will drop to 0.15% from the current 0.25%. The South Korean benchmark, KOSPI.KS11, fell 1.04% in early trading on Thursday, echoing the broader global downturn.
Moreover the ministers of South Korea have proposed to lower the threshold at which companies are eligible for married tax incentives.
Currently, to reduce taxes, a firm must devote more than 5% of gross sales from previous years to research and development and 10% of investment in this area should be focused on innovative technologies such as block chain.
Because low or no sales in a startup’s first year can make it difficult to apply for married tax incentives, ministers believe the R&D investment requirement should be revised to 5% of gross sales this year.
This is all about the economics and tax system of South Korea, and now it’s time to discuss the next most powerful country’s economics and tax structure.
Japan is one of the most highly developed economically and technologically countries in the world.
However, the internal structure and functioning of this state as a whole differ markedly from other countries, whose economies are developing no less successfully. Japan is a constitutional monarchy in terms of government.
At the same time, the state is divided into 47 prefectures and has about 2000 municipalities. In this part, we will talk about how the Japanese tax system is structured and works.
In terms of GDP and industrial production, Japan ranks third among countries in the world, after the United States and China. High technologies are developed (electronics and robotics).
Transport engineering is also developed, including the automotive industry and shipbuilding, machine tool construction. The fishing fleet accounts for 15% of the world. Agriculture is subsidized by the state, but 55% of food (calorie equivalent) is imported. There is a network of Shinkansen high-speed railways and expressways.
The tax system in Japan, as in the United States and Europe, is characterized by a plurality of taxes. Each territorial administration body has the right to levy them.
But all taxes in the country are fixed in legislative acts. Each type of government tax is regulated by law.
The law on local taxes determines their types and marginal rates, otherwise the establishment is carried out by the local parliament. In total, the country has 25 state and 30 local taxes. They can be classified into three major groups:
- The first is direct income taxes on legal entities and individuals.
- The second is direct property taxes.
- The third is direct and indirect consumption taxes.
There are 25 state and 30 local taxes in Japan. They can be divided into three large groups: direct income taxes on individuals and legal entities, direct property taxes, and direct and indirect consumption taxes.
In Japan, there are three types of local taxes levied by municipalities:
- corporate municipal;
- equalization tax.
Also special is that the fiscal year and tax period in Japan ends in March, and a new one begins in April.
Let’s take a closer look at some types of taxes.
Income tax is payable by individuals who are recognized as permanent and temporary residents of Japan, as well as by non-tax residents, on income derived from sources in Japan.
All rates are differentiated by the amount of income received by citizens, fluctuate in the interval:
- national – from 10% to 50%;
- prefectural – from 2% to 4%;
- municipal – from 3% to 12%.
Despite the fact that Japan is a unitary state, the country has a well-developed local government, which has significant powers, including in terms of the introduction of various taxes and their collection.
In fact, tax revenues to the central and local budgets are approximately equal: the ratio of collected funds is approximately 53 to 47% in favor of the central budget. The peculiarities of the Japanese tax system led to the formation of a two-tier system of tax authorities.
At the national level, taxation in the country is administered by the Ministry of Finance. Its structure includes two divisions: the Tax Bureau and the Bureau for Customs Duties and Tariffs.
These divisions are primarily concerned with planning the tax policy of the state. The implementation of this policy is directly handled by the National Tax Administration, which is also part of the country’s Ministry of Finance. a very powerful organization with 56,466 employees distributed among the central office, 12 regional tax offices, the Regional Tax Office on the island of Okinawa and 524 tax offices.
In addition, the NTA has its own college and the National Tax Tribunal, where you can appeal the miscalculation of fees. It is this organization that exercises tax control in Japan.
All structural divisions of NTA are divided into three departments:
- Tax department.
- Tax collection department.
- A department that deals with inspections and investigations in cases of tax evasion.
It is the last department that supervises the practical work to identify violations in the tax area and to suppress them. To this end, it includes departments for audit, investigation and international cooperation in the field of combating tax violations. In preparing legislative changes in the field of taxation, the State Tax Commission under the Prime Minister, a similar commission of the ruling Liberal Democratic Party and the Headquarters for Structural Reforms headed by the Prime Minister of the country closely cooperate.
Tightening tax policies and tax breaks in Japan are administered by these three organizations.
In the area of fundraising, the main organization is the Ministry of Finance. Each type of fees in the Land of the Rising Sun is regulated by a separate law.
It should be noted that the laws in this area are very voluminous and difficult for non-professionals to understand, therefore the country has an institution of authorized tax consultants.
These are licensed specialists who prepare and submit most of the tax reporting documents in the country on a paid basis. Authorized collection advisors serve both individuals and legal entities.
The relationship between central and local authorities in the financial sector is determined by special laws.
Despite the constant increase in the volume of local fees, they are not enough to finance all local needs, therefore, part of the costs is financed from the central budget.
To cover the imbalance between the needs and capabilities of local budgets, tax revenues are redistributed.
Thus, the regions receive 32% of income tax, alcohol tax and corporate tax. The state transfers 25% of the tobacco tax to the regions, and 24% of the consumption tax. Unlike targeted subsidies and subsidies, local authorities use the received shares of taxes at their own discretion.
In addition, there is a system of “surrendered taxes” in which special national taxes, such as the maintenance of the road network, are transferred to local authorities. Taxation in Japan is organized in such a way that the payment of taxes in the structure of citizens’ expenses rarely exceeds 20%.
For developed countries, this is a fairly low level. Moreover, with a shortage of funds, the government prefers to borrow rather than raise taxes for its citizens. For this reason, Japan’s public debt is about 200% of its annual GDP.
There are local taxes:
- Accommodation in hotels and use of catering establishments. So, if the payment for one person’s accommodation during the day exceeds 10 thousand yen or if the payment per person for one visit to the restaurant exceeds 5 thousand yen, a tax of 3% is charged.
- There is a tax of 150 yen per person for one day of visiting the hot springs, and 800 yen for one day of using the golf course. These taxes are levied in addition to the usual 3% consumption tax.
- The owner of a car is forced to pay a whole lot of taxes: 3% consumption tax on the purchase and tax on the purchase of a car, taxes on gasoline, tax on the car itself and on its weight.
In particular, the followings are subject to taxation:
- Interest income from securities of the state and corporations.
- Interest accrued on loans issued to entities doing business in the country.
- Dividends from shares.
- Counter satisfaction for the use of movable and immovable property.
- All types of remuneration (salaries, bonuses, etc.) for the provision of services in the country.
- Pensions and severance pay.
- Income from the transfer of copyright and patent rights.
- Income from the rental of equipment and machinery.
- Advertising revenue.
- Profit from the redemption of Japanese bonds.
- Profit distribution.
- Income from business activities.
All of these earnings are considered profit and this is not a complete list. Income tax in Japan, depending on the amount of taxable profit, can be from 22 to 30% for local companies, and from 29.33 to 40.87% for foreign legal entities.
In Japan, there are two options for paying capital gains tax on the sale of said shares.
The first, Withholding Tax, is taxed on all income (whether profit or loss) at 1.05%. The second method, declaring income as “taxable income” requires people to declare 26% of their income on their tax return. Many traders in Japan use both systems, declaring profits under the income tax system and losses in taxable income, while minimizing the amount of income tax paid.
In 2003, Japan scrapped the system higher in favor of a flat tax of 20% on profits, although the rate was temporarily halved at 10%, and after being pushed back several times the return to the normal rate of 20% is now set for 2014.
Losses can be carried forward for 3 years. Starting in 2009, losses can alternatively be deducted from dividend income declared “Separate Income”, since the tax rate for both categories is equal (ie 20% is temporarily halved, to 10%). Aggregating profits and dividends to achieve one taxable figure at the same rate is quite innovative.
The system of tax incentives currently in force is based on various kinds of regional development laws and consists mainly of measures to reduce or even completely exempt from local taxes.
So both South Korea and Japan are the most powerful countries of Asia, which has the most developed economics and consequently the tax system. Here in this article, I showed you all the main points of both countries’ tax structures.
A final tip
As a final tip, one way you can reduce your taxes in either countries as an individual is by taking advantage of overseas income.
Overseas neither country has a territory tax system, if you have lived in Korea for 5 years or less in aggregate in the last 10 years, you can pay 0% tax on that overseas income.
So, if you can get onto a work permit and have a company domiciled offshore, you can often legally pay 0% tax for the first 5 years in Korea. Japan has a similar system.
Of course though it depends where your company or employer is domiciled and your nationality.
Countries that charge tax based on citizenship (the United States, Eritrea and a few others) will still levy taxes even if you are an expat.